In a unanimous decision, the United States Court of Appeals for the Tenth Circuit reversed a district court decision holding that HHS’ use of the statewide premium average to calculate Affordable Care Act (ACA) risk adjustment charges and payments from 2014 to 2018 was arbitrary and capricious. See N.M. Health Connections v. U.S. Dep’t of Health & Human Servs., Case No. 18-2186, 2019 U.S. App. LEXIS 38739 (10th Cir. Dec. 31, 2019). New Mexico Health Connections (NMHC) filed the original lawsuit claiming that the ACA risk adjustment methodology adopted by HHS unfairly penalized smaller insurers. The district court agreed and held that HHS failed to sufficiently explain its decision to use the statewide average premium versus other alternatives in the ACA risk adjustment program. In addition, the district court had held that HHS erroneously interpreted the ACA’s risk adjustment provision to require budget neutrality and that budget neutrality was a policy goal for the agency.

The Tenth Circuit disagreed and invoked the APA’s deferential standard of review noting that the scope of its review was “narrow” and that the agency only needed to examine the relevant data and articulate a satisfactory explanation for its decision, including a rational connection between the facts and the decision made. The Court held that this standard was satisfied because HHS explained its rationale during the notice and comment rulemaking process. Among other things, HHS explained that it chose a statewide premium average over alternatives such as the plans’ own premiums to: (1) “reduce the impact of risk selection on premiums while preserving premium differences related to other cost factors,” (2) “achieve a straightforward and predictable benchmark for estimate transfers” each year, (3) “promote risk-neutral premiums,” (4) “avert caus[ing] unintended distortions in transfers,” (5) avoid disproportionately distributing costs to insurers when balancing adjustments,” and (6) facilitating budget neutrality by making transfers “net to zero” without any additional balancing adjustments. Based on these justifications, the Tenth Circuit held that HHS “acted reasonably” in choosing statewide average premiums over other alternatives. In addition, the Court noted that no commenters challenged the agency decision to use statewide average premiums in the 2014, 2015, or 2016 rules.

With respect to the issue of budget neutrality, the Court of Appeals disagreed with the district court that budget neutrality was a policy goal for HHS because it determined that neutrality was a “product of funding constraints” because the “statute that created the program lacked any funding authorization.” The Court held that HHS could not have violated the APA in designing the risk adjustment program as budget neutral because “it lacked funding to do otherwise.”

Going forward, NHMC can either seek en banc review from the Tenth Circuit or file a Cert Petition with the United States Supreme Court to review this decision. We will follow any developments in this case in the coming weeks and provide further updates as the appeal continues to progress.